Exports to change the nature of propane businesses

A new era of waterborne shipments is underway, but the impact on shifting supply is not fully realized.

Supplier activity to export LP gas from the U.S. is up at a time when retail demand has slowed. Photo: iStock.com/MsLightBox

What do Europe’s winter temperatures have to do with propane consumer markets in the United States? How about China’s petrochemical facilities or cooking fuel for third-world countries?

Factors like these had not previously moved propane from the U.S. to the world market, but the global supply landscape and the U.S.’ role within it have changed. The U.S. is a net exporter of propane for the first time in history because of the shale revolution and the subsequent increase in propane production. These developments have positioned the U.S. as a major player in the supply of propane around the world.

And although propane is being abundantly produced in North America, it may not be as readily available to propane retailers as it once was. Competition has emerged overseas, and it is bound to affect the market at home.

“Because we’re linked to the international markets now, the markets here may become more volatile,” says Mike Sloan, principal at ICF International, a consulting firm that provides expertise on energy and other areas. “Certainly they’re more influenced by what happens in international markets. With a great, cold winter in Europe, you’ll see higher [propane] prices in the United States. A warm winter in Europe would lead to lower prices. We’ll also see the impact of ups and downs of economic growth in Asia more directly with the excess production.”

Weather isn’t the only factor driving interest in propane, though. A number of countries see an opportunity in propane as a cooking fuel, and imported U.S. propane is a viable source for them.

“There are 3 billion people outside the U.S. who don’t have clean fuel to cook with,” says Anne Keller, natural gas liquids (NGL) research manager at Wood Mackenzie. “You’ve got people who are spoiled for choice between multiple fuel types versus people looking at their kids, spending hours a day gathering wood, building up cooking fires and looking at the potential for benefit from the [propane] surplus.”

The seven planned facilities represent 817,000 barrels per day of export capacity.

Exporters clearly see the opportunity, too. A number of large facilities, particularly along the Gulf Coast, are scheduled to come online over the next few years. Propane is expected to be plentiful in North America over the next 10 years, too, as ICF International forecasts propane production to nearly double between now and 2025.

But will propane be readily available to meet domestic demand, and at what price?

“There’s more than enough propane,” Sloan says. “It’s just making sure it gets to the consumer markets. Markets work with price signals and longer-term planning, but that is probably a change from how the market has functioned in the last five years or so.”

The changing landscape
U.S. consumer propane markets are in decline, though, and they’re projected to continue their fall, according to ICF International. The residential heating market, for example, is forecast to decline more than 7 percent through 2020.

But while consumer propane demand is down, supplier activity to export propane is up.

“If we look at what’s happening in the next couple of years, you’ve got the big terminals coming online in the Gulf Coast – the Enterprise [Products Partners] and Targa [Resources Partners] facilities, as well as the Phillips 66 and Occidental [Petroleum Corp.] terminals,” says Sloan, referring to five Texas projects that represent about 615,000 barrels per day (bpd) in new or planned export capacity. “That’s the majority of the new capacity, and they’re located in a region of the country that’s best suited to handle large-volume exports.”

ICF International forecasts export capacity to more than double through 2016.

Sloan’s understanding is that the Enterprise and Targa facilities are fully contracted and are expected to operate at a high-load factor. Other Gulf Coast export terminals may not operate at a high-load factor, he says, and exports at those facilities will vary based on international demand.

“In the short term, I don’t think there will be any major new announcements out of the Gulf Coast until the market shows that it’s able to absorb the facilities that are on the way now,” Sloan says. “I think there is potential growth in both the West Coast and East Coast.

“On the East Coast, you have the facilities planned and underway that will likely continue to grow exports up to capacity,” he adds. “On the West Coast, there are several smaller projects because they’re simply not on the same scale as the Gulf Coast projects that are underway.”

Canadian propane production will largely serve the West Coast facilities, Sloan says, including Petrogas Energy Corp.’s existing facility in Ferndale, Wash.; Sage Midstream’s proposed facility in Longview, Wash.; and Pembina Pipeline Corp.’s proposed facility in Portland, Ore. Pembina also has a proposed 40,000-bpd facility in Prince Rupert, British Columbia, Canada, that’s expected to be operational in the first quarter of 2016.

“The Canadian markets will be looking for additional opportunities, and exports make sense for them,” Sloan says.

Still, Sloan says an overbuild scenario could take place if all export projects are realized. According to ICF International, total North American export capacity would reach 1.34 million bpd if all proposed terminals are built. But having too many terminals would result in some facilities not being fully utilized.

“The availability of excess capacity means U.S. shippers will be competing with international shippers for propane supply,” Sloan says. “That will equilibrate international prices and domestic prices. The domestic consumers will compete for those supplies, but they’ll be competing on a price and contract basis.”

The majority of retailers believe the consumer market should be served before exports.

“You’re going to have to keep an eye on what people are willing to pay for propane outside the U.S.,” she says. “You used to not have to follow prices outside the U.S. Now, you’re having to follow Asia and Europe to see what the competition is putting the barrels out there for and what you’re going to need to pay to use them here.

“The key thing for retailers to get used to is that there may not always be another party besides them who is going to make the investment in carrying barrels for winter,” Keller adds.

Retailer adjustments
In addition, because the export market offers more year-round stability, it is attractive to companies that would prefer not to meet swings in demand.

“In that sense, the export market is more attractive than the consumer market to many of the propane suppliers,” Sloan says. “That means much of the supply may be contracted and committed to export customers and not available to the consumer market.”

This development also means propane retailers may have to adjust their buying habits.

“It increases the importance of contracting earlier and contracting for more of the full supply by the propane marketers,” Sloan says.

Retailers probably won’t encounter too many challenges in years of mild winters and minimal demand for crop drying, Sloan adds. But retailers should not count on weather and other drivers to always align in their favor.

“If it’s warm and there’s no grain drying, the marketers are probably going to be fine,” Sloan says. “But you don’t want to count on that.”

Keller says the effect of exports has already been felt this winter.

“This winter what’s happened is Conway, [Kan.], has been kept at relatively traditional levels, and the barrels are coming south now because they’re being staged for export,” she says. “If you’re not close to these facilities, you have to put a pencil to it and ask how much more swing storage would I possibly need if I had to worry about a shortage more often than not?”

The petrochemicals market, both domestically and internationally, is a factor in propane availability, as well.

“If we don’t have the Asian petchem market, demand will be much lower,” Sloan says. “That can result in a sustained period of relatively low propane prices here in the U.S. The overall demand for propane will depend on what happens with facilities in China.”

Retailers on propane exportsLP Gas magazine surveyed propane retailers late last year about a number of industry topics, including propane exports. We specifically asked retailers if they were in favor of propane exports, and two-thirds told us they are but only when domestic supply is sufficient. Nearly 20 percent of retailers say they are for propane exports in all circumstances. Fourteen percent told us they were against propane exports.

■ “Provide more storage at refineries and pipelines. Limit propane exports during supply restrictions.” – a major Gulf Coast retailer

■ “Until we as a nation quit exporting our fuel and driving our fuel prices through the roof, our industry will continue to decline. Because of high pricing, customers are switching to other sources of energy. We are hurting our nation.” – an independent Rocky Mountain retailer

SPECIAL REPORT FROM LP GASThe propane industry experienced one of the most challenging winter heating seasons on record in 2013-14. In preparation for future winters amid a changing energy environment, LP Gas is examining the issues that led to what some called a crisis supply situation. We are reaching out to all segments of the industry to explore our past and future, bringing attention to key subjects, initiating industry dialogue and providing necessary education to our readers.